Fitch Ratings has affirmed Ireland-based building materials company CRH plc's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. It has also downgraded the Short-term IDR to 'F3' from 'F2'. All ratings have been removed from Rating Watch Negative. The Outlook is Negative. This follows the group's announcement of its agreement to purchase CR Laurence Co, Inc (CRL) for a total consideration of USD1.3bn (EUR1.2bn).
The 'BBB' senior unsecured ratings for subsidiaries CRH America Inc., CRH Finland Services Oyj, CRH Finance BV, CRH Finance Limited, CRH Finance Germany GmbH and CRH Finance Switzerland AG have also been affirmed.
The Negative Outlook reflects a weakening of CRH's credit metrics beyond Fitch's negative rating guidelines, following the completion of two sizeable cash acquisitions. Nevertheless, if CRH's integration plans are successful, Fitch's growth expectations for the business foresee a restoration of the metrics in 2016 to levels consistent with the Long-term IDR. We will monitor closely the group's deleveraging over the coming 18 months and trading performance against our expectations of a recovery in key end-markets.
The downgrade of the Short-term IDR reflects deterioration in CRH's internal liquidity ratios from the use of cash for its acquisitions. Fitch expects the ratio of year-end available cash to short-term debt maturities and free cash flow (FCF)-to-EBITDAR to be more commensurate with a 'F3' rating, following the CRL acquisition.
Key rating's drivers
CRL provides CRH with a good brand and a complementary portfolio of hardware products sold to the residential and commercial glazing industry. It benefits from healthy growth and margins, deep channel loyalty and lean manufacturing capabilities. Potential synergies exist in cross-selling products to the two companies' common customer base and cross-distributing these across a wider combined network. CRH expects synergies of US$40m per annum.
Shift in acquisition strategy
The acquisition of CRL and LafargeHolcim's global assets together amount to an all-time high of EUR7.7bn in gross acquisitions for CRH. This compares with cumulative net disposals of EUR280m over the last four years and is a shift in CRH's historically conservative acquisition track record. It also occurs during a time when the recovery in Europe is still nascent. CRH has a larger exposure to developed markets compared with some of its building materials peers.
Increased integration risks
The CRL acquisition poses additional modest transaction risk during a time when management is focused on the LafargeHolcim transaction. However, CRL is a small business compared with CRH's scale and CRL will also continue to be operated as a stand-alone company reporting into CRH's management. CRL's management team will remain intact after the transaction has been completed.